For instance, shares in Aim-traded investment company Aurora Russia (AURR: 20.5p) are languishing at a multi-year low and on a huge discount to book value even though the board are making a significant capital return to shareholders. The company is in the process of selling down its assets and already bought back 36.9 per cent of its share capital at 52.3p a share last May. Moreover, following another asset disposal, the board plan to return at least £8.25m back to shareholders through a tender offer process with the shares being repurchased at net asset value per share (at the unaudited value as of 31 March 2014), less a one per cent discount for costs associated with the repurchase.
That’s a significant capital return given that based on 74.7m shares in issue Aurora’s market capitalisation is only £15.3m. It also means that post the capital return that Aurora’s adjusted market value of £7m is a fraction of my estimate of the company’s proforma book value of £17.7m at the end of March 2014, of which around £3.3m will still be cash! All these figures have been adjusted for the £8.25m of cash to be returned. No matter which way I look at it the shares are chronically undervalued.
Sum-of-the-parts valuation
At the end of September, Aurora’s net cash was £4.2m and receivables of £2.9m were turned into cash after the half-year end following receipt of the final proceeds from the £30.6m sale of Aurora’s stake in OSG, a fast-growing and profitable records management provider with operations in Russia, Poland, Ukraine and Kazakhstan. This meant that net cash was £7.1m at the start of 2014, or the equivalent of 9.5p a share.
That cash pile has grown even more since then because Aurora has sold off Flexinvest Bank, a Moscow-based retail bank. This holding was in the accounts at £6.3m at the end of September 2013. Aurora received net cash proceeds of £2.9m after factoring sale costs of £300,000, and the transfer of mortgages worth £2.4m, previously held by Flexinvest, to its subsidiary Kreditmart Finance Limited (KFL). These mortgages have now been sold off and Aurora has just announced the sale of KFL and the mortgages for £1.97m. The discount to the £2.4m carrying value reflects the current market conditions in Russia for banking assets.
So by my reckoning, as soon as the disposal of KFL completes, Aurora will have net cash of around £12m, less its operating expenses between the end of September and the end of April. I estimate these costs at around £50,000 per month, or £350,000 in total.
That means that by my calculations net funds are now around £11.6m, or 75 per cent of the company’s market value. Or put it another way, strip out that proforma cash balance of £11.6m (post the sale of KFL) and Aurora’s current market value of £15.3m is attributing only £3.7m of value for the company’s two remaining investments. That’s crazy because after the tender offer is completed the company will still have net cash of around £3.3m, a market value of £7m and holdings worth £14.4m in DIY retailer Superstoy and Unistream Bank.
True, both of these residual investments are plays on the Russian economy, and credit growth and consumer spending, in particular. Clearly, recent events in Ukraine, and the unstable geopolitical backdrop, mean it could take some time to realise value from these Russian investments. But as the sale of OSG and Flexinvest highlight, there is still a market in higher risk assets no matter the economic and geopolitical back drop.
Currency movements
Ultimately, the only thing that really matters is the price a buyer will pay. In the circumstances, attributing a 75 per cent discount to my written down book value of Aurora’s 24.3 per cent stake in Superstoy, a leading DIY retailer in Russia, is plainly absurd. The holding was last valued at £6.3m at the end of September 2013.
True, the 15 per cent slide in the Sterling-Russian Ruble exchange rate since then will mean the sterling value of the holding will have to be marked down to £5.4m in the March year-end accounts, assuming no impairment cost on the investment. I still estimate Superstoy is generating annualised underlying cash profits of around £6m (before pre-opening expenses for three stores opened last year) on sales of £160m, so a valuation for the whole company of less than £22m hardly looks exacting.
I also need to factor in the depreciation of the Russian Ruble to Aurora’s investment in Unistream. On this basis, the carrying value of that holding falls from £10.7m at the end of September to around £9m. On an annualised basis, Unistream was on course to make a pre-tax profit of around £1.6m on revenues of £40m last year. Aurora owns a 26 per cent stake in the bank, so a £36m value for the enterprise doesn’t seem unreasonable.
The bottom line is that adjusting for exchange rate movements the holding in Unistream is currently worth £9m and Superstoy around £5.4m. That’s a total of £14.4m. However, these stakes are only being priced at £3.7m in Aurora’s market value, an anomaly to say the least. It also means that even if Aurora decides to write-down the value of these stakes further, then the ‘margin of safety’ we have is so huge that the downside risk of buying its shares now is minimal.
Return of capital
By my calculations, Aurora’s proforma net asset value is likely to be around £26m at the end of March 2014 after adjusting the carrying value of the investments in Unistream and Superstroy for the depreciation in the Russian Ruble since the end of September 2013. Based on 74.7m shares in issue, this implies a March year-end net asset value per share of 34.8p.
So, given that Aurora is returning £8.25m of its £11.6m cash pile to shareholders this would result in the repurchase of 23.7m of its 74.7m shares in issue at around 34.8p each. That would leave 51m shares left in issue. If the shares continue to trade at the current share price then in effect you are getting 70 per cent upside on around 30 per cent of your holding for free.
It also means that Aurora shares would have to fall by a third from 20.5p to 13.7p for there to be no financial gain by buying in advance of the tender offer. Frankly, I just can’t see that happening because I am sure other investors will have noted today’s tender offer announcement and will have done the calculations I have carried out above. Expect their conclusions to be the same as mine. Namely, the current valuation is simply anomalous and this is a great buying opportunity and one fully supported by the technical indicators.
Technical set-up and target price
Having traded sideways at the 20p level since early December, it would appear that the price decline has ended and the share price has based out. With the 14-day relative strength indicator (RSI) not overbought there is ample scope for a recovery from here and a move to the March highs of 25p. Beyond that the November highs of 28.75p look well in sight.
In my opinion, the fundamental investment case is strong enough to warrant such a valuation. So, taking all the above factors into consideration, I rate Aurora shares a value recovery buy on a bid-offer spread of 19.5p to 20.5p.
Please note that I am working my way through a long list of companies on my watchlist that have reported results or made announcements recently including: Pure Wafer (PUR), Eros (EROS), Inland (INL), API (API), H&T (HAT), Record (REC), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Pittards (PTD), Thalassa (THAL), Camkids (CAMK), Taylor Wimpey (TW.), Barratt Developments (BDEV), Bovis Homes (BVS) and Terrace Hill (THG).
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